Expanding Opportunity in Low-and Moderate-Income Communities

In many communities, CDFIs are the sole business offering safe, affordable financial services and products. Over the course of the past several decades, these businesses have invested billions in LMI communities, enabling families to build wealth through homeownership, funding affordable housing development, financing local businesses, and providing accessible savings and loan products to millions. But there is a lot more work to do. Expanding the capacity of CDFIs should be a top priority for financial sector leaders and policymakers who want to close the wealth gap and bring equal opportunity to underserved groups. In a recent report, Prosperity Now, with support from The Change Company CDFI, LLC, identified some of the core challenges facing CDFIs and best practices organizations employ to maximize impact. To add the most value to target markets, successful CDFIs employ tailored product and service offerings, wraparound support, and innovative partnerships within communities to expand capabilities and local engagement.

Centuries of racism, discriminatory practices, and structural barriers have withheld opportunity for millions of low-income families and communities of color. There is immense opportunity for CDFIs to engage these groups and bring financial and banking services where they are most needed. To successfully expand their impact, CDFIs need to be agile and creative, developing dynamic products and solutions that meet customers where they are. As mortgage lenders, CDFIs like The Change Company CDFI, LLC excel at identifying useful criteria and deploying mortgage products that assess prime borrowers on factors other than W2 income, enabling them to obtain fair market mortgages not made available by traditional lenders. Other CDFIs are closing the affordability gap by identifying distinct needs in the market, like accessible second mortgages that help customers avoid more expensive private mortgage insurance, leaving them with monthly cost savings that can be put toward other essential needs.

And product innovation isn’t limited to loans. Prosperity Now is a major proponent of Individual Development Accounts. These savings vehicles offered by CDFIs match deposits to encourage savings for specific purposes, like funding a small business, education, or home purchase. As of 2016, nearly 114,000 IDA accounts were open with over $70 million in earned income deposits withdrawn to fund life-changing investments. To further expand homeownership, innovative CDFIs have helped initiate residential cooperatives or community land trust organizations. These entities help bring down the cost of owning a home by spreading the cost of land ownership, developing and preserving multifamily housing, and establishing restrictions on reselling, leasing, or income eligibility for residents. By expanding homeownership opportunities, CDFIs are helping families with a major step toward wealth building.

To further establish trust and develop effective, targeted products, it’s essential that CDFIs establish deep understanding of target markets and local communities. This is best done by developing partnerships with community organizations on the ground. In many low-income areas, a CDFI is literally the only traditional financial institution available to consumers. For the 13.8% of Black and 12.2% of Latinx households that are unbanked and used to payday lenders and other high-cost, high-risk services that can damage credit and opportunity, trusting a financial institution may be a foreign concept.

Partnerships with local leaders and community-based organizations help CDFIs grasp the lived experience of their target market. Effective partners can serve as surrogates for the institution where trust may be challenging to earn, further legitimizing the CDFI and its service offerings with community members.

Wraparound support is another source of trust building for CDFIs and a key differentiator compared to traditional financial services. Going beyond products and capital, CDFIs are more likely to meet their double bottom line goal of financial success and community impact by providing wraparound services that help borrowers throughout the life of their relationship with the business. Services like the Portland Housing Center’s homebuyer education classes, Neighborhood Partnership Housing Services’ counseling programs, and other high-touch servicing help guide prospective and new homeowners through the home buying process. Touchpoints before, during, and after home purchase help ensure that homeownership is sustainable and results in the lower-than-average default and foreclosure rates enjoyed by many CDFIs. As a central barrier to wealth generation, sustainable homeownership is core to CDFI goals to close the wealth gap in America.

While the strategies in this paper highlight some of the best practices for CDFIs to expand their impact, ultimately, to accomplish these goals more capital is needed across the industry. Without adequate capital, organizations are unable to innovate and expand service offerings to meet the needs of more LMI borrowers, reach new markets, or invest in high-touch services to support customer success. CDFIs must tap into underutilized capital and advocate for increased federal funding and reforms to the Community Reinvestment Act that reflect the urgent need for targeted, life-changing investments in LMI communities.

Information in this article comes from “Expanding Homeownership in Low- to Moderate-Income Communities,” authored by Pamela Agava (Former Senior Program Manager, Affordable Homeownership), Laura Yepez (Program Manager, Ecosystem Change), Simone Robbennolt (Senior Research Associate) and Doug Ryan (Interim Vice President, Policy & Applied Research) at Prosperity Now. For more details, see the full report at prosperitynow.org/resources/expanding-homeownership-low-moderate-income-communities.